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How Impact Investing Is Promoting Climate-Friendly Projects

  • By KCV
  • August 3, 2020

Most startups and small enterprises in Kenya find it difficult accessing flexible financing, tailored to the cash-flow nature of their businesses.

The funding gap has particularly been more conspicuous for clean-tech projects, given that it is a relatively new field with lenders lacking a complete picture of its viability. It is for this reason that sustainability-inclined organisations such as Kenya Climate Ventures (KCV) are stepping in to help plug funding and advisory gaps for climate-friendly businesses.

KCV – a subsidiary of Kenya Climate Innovation Center (KCIC) – funds and trains small and medium-sized enterprises (SMEs) operating in clean technology (cleantech) sectors such as – renewable energy, agribusiness and water management. Others are commercial forestry and waste management.

Africa Sustainability Matters reached out to the CEO Victor Ndiege to shed more light on impact investing in the country, as well as future plans.

He believes that beyond creating new paths towards a healthier planet, impact investing could help eradicate extreme poverty in the society, wipe out hunger and attain food and energy security, and expand access to clean drinking water.

Here are the excerpts:

What does KCV stand for?

Kenya Climate Ventures is an impact investment company with the aim of providing financial and technical support to SMEs working to create transformative change in the climate-related sectors.

Besides providing seed capital to enterprises, we offer technical and management advisory services, equipping businesses with market skills and increasing their chances of succeeding.

How many organisations have since benefited from KCV?

We have so far invested a total of $2.67 million (Sh285 million) in six enterprises across the country.

This includes Exotic EPZ and Mace Foods, both of which are in agribusiness, Ofgen (solar energy) and Sistema.bio (biogas solutions provider).

We’re now looking to invest in 14 more companies in the next two years and 34 companies in the next four years.

What do you look out for in an enterprise?

In addition to being in the climate-related fields, we classify enterprises into two – early-stage businesses and growth stage.

Early-stage are startups with annual revenues amounting to less than $150,000 (Sh16 million) whereas the growth stage takes into consideration enterprises generating above $150,000 in turnover.

What is the size of your funding?

For the early-stage, our investment range is $50,000 – $200,000 while for the growth stage it’s from $100,000 to $1 million.

What are the repayment terms?

KCV offers affordable, flexible and patient capital, giving a lifeline to most SMEs in the climate-friendly industries who would otherwise find it hard to access and repay commercial bank loans.

What is your investment model(s)?

Previously, we only had the debt and convertible debt options. But we have now diversified our financing instruments beyond the above two to include equity – giving individual companies a variety of alternatives to choose from.

We have learnt that most early-stage companies would go for equity and convertible debt because they need more patient capital while the growth stage companies will certainly go for the debt option.

Most SMEs don’t live to see their third year in business. What mechanisms have you put in place to prevent collapse of funded enterprises?

It’s true that almost 80 percent of SMEs do not make it to their fifth year.

Now, imagine working with such businesses in an even more challenging market – climate change – where they have to maneuver a unique set of curveballs in addition to normal business challenges. Indeed their survival rate has been lower in the past, hindering many enterprises from growing into commercial ventures.

Therefore, to increase their chances of succeeding, KCV is offering business development support and technical assistance. This ensures the right structures have been installed and recommended improvements made, before beneficiaries are provided with financial support. Some sort of due diligence.

At the same time, we offer post-investment reviews, which help identify the specific needs that require adjustments to ensure the success of the enterprise. And this includes linkages to markets.

To this end, our underlying principle is that that the success of the businesses we invest in is the success of KCV. Basically, KCV’s portfolio wouldn’t be a good story without the success of these companies.

We have, therefore, taken a partnership approach to performance monitoring and portfolio management in order to create value for these companies.

We deeply recognise that our growth is dependent on the growth of our client companies, and this is firmly embedded in our model.

KCV recently added waste management and commercial forestry to the list of projects eligible for funding. What informed this move?

Indeed that’s true. For the last four years, our focus has been on renewable energy, agriculture and water but now the scope is expanding. We are currently foraying into commercial forestry. This is due to the contribution that forestry plays in climate change.

We are also entering waste management – recycling of agricultural waste, as well as converting waste into building materials, energy and non-agricultural waste – with the aim of reducing carbon dioxide emissions.

Our expansion into these new fields serves to increase opportunities for entrepreneurs looking to enter or grow their ventures in the said areas. Most often such enterprises are perceived as risky by conventional investors and commercial banks, leaving the sectors underserved.

What impact has KCV investing had on the society?

To begin with, over 300 jobs have been created and sustained through the funded enterprises. Next, some 3,000 farming households have had access to cleaning cooking solutions courtesy of our investee – Sistema.bio (biogas provider).

Note that four of the six ventures we have invested in are in agribusiness. To this end, they have reached 5,000 smallholders farmers, granting them access to markets and improving their production over the past three years.

Additionally, 30 percent of KCV clients are women-owned enterprises, which is important to us.

Lastly, we have facilitated installation of off-grid solar, through our investee Ofgen, retuning huge savings for businesses and lowering their carbon footprint.

How has Covid-19 affected your operations?

Covid-19 actually came during our transition – evolving to position KCV as an investment partner in adverse markets, including harsh effects of climate change.

Notice that Covid-19 situation is no different from this purpose, and therefore we’re continuing with our investment plans. Our goal is to enable partnerships, facilitate enterprises to scale and bring about impact – partnerships, facilitation and impact.

But for our existing clients, as is the case across industries, the crisis has somehow impacted operations.

To this end, we have since put in place a few guidelines to help these enterprises limit the effects of Covid-19 on their businesses and ensure continuity. The measures include:

  • We have deliberately linked our portfolio companies to investors in our network for additional liquidity boost.
  • We’re discussing with the enterprises to restructure our conditions so that they get a cash-flow breather during this time of Covid-19.
  • KCV has also supported companies to embed digital marketing platforms in their operations.

Challenges in impact investing?

Indeed there are challenges, namely:

  • The economies of scale are still lower in this space, being a relatively new frontier, but one with a potentially high-growth rate.
  • Climate financing comes with a challenge, especially where SMEs are involved and thus this kind of investment calls for patience among other things. For this reason, we are seeking funding partnerships with more development partners and organisations.